Last week, I wrote about A new Duke University report, undertaken in conjunction with the Alliance for American Manufacturing, which examines how China's excess steel capacity — the issue is not just how much it produces, but its resources dedicated to production — is affecting worldwide markets and putting companies and workers at risk, including many here in the U.S.

This week, I had the chance to speak with the report's author, Duke researcher Lukas Brun, about how U.S. and international officials should engage China on questions related to its steel industry, and about how and why the sector has grown so big, so fast.

Is China willfully trying to dominate or destroy competitors in that and other industries? A conversation with Brun suggested the answer is somewhat complex. So are the solutions.

Chinese policies

Lukus Brun

The expansion of China's heavily subsidized and government-run steel sector since 2000 has boosted capacity in the global steel sector to over 2,300 million metric tons, while only 1,500 metric tons are needed to meet global demand, Brun's study found.

While China acknowledges the issue and repeatedly has pledged to cut its steel capacity, progress has been very slow, to the detriment of U.S. and international producers.

China's economy is state-directed, and that sets up a conflict with free-market systems in the U.S., Europe and elsewhere.

"Companies are good at competing against other companies," Brun said. "When companies have to compete against governments, I think there is a real question of fairness."

Governments, like the one in China, wield broad powers in a planned economy, and are engaged in close relationships with companies, particularly in key sectors such as steel. They are powers that companies — and governments — lack in a free-market system.

As China's economy grew exponentially over the past two decades, so did its need for higher-grade steel used in commercial, residential and infrastructure construction, Brun said, and much of it was still being imported.

Government planners in the early 2000s determined that steel was a "pillar and strategic industry," and that the nation needed to become self-sufficient, weaning itself off imported steel, Brun said.

China has a long history of steel production, but much of it historically had been lower grade, with higher grades previously imported as needed. As late as 2005, China still was importing about as much steel as it was exporting: 27.3 million tons came in, while 27.4 million tons went out, according to World Steel Association (WSA) statistics. (Only 2 percent of those imports came from North America, incidentally, with more than half coming from Japan and other other Asian countries, 19 percent from South America and 18 percent from the former Soviet Union.)

Since 2007, when overcapacity in the Chinese steel sector became apparent in the country's own planning documents, China has added 552 metric tons of new capacity, Brun wrote — equivalent to seven times total U.S. steel production in 2015.

That imbalance ballooned thanks to the global economic crisis of 2008, Brun explained, when Chinese domestic demand began falling, while the Chinese kept adding steelmaking capacity.

Why?

The growth in steel production has been a major job creator, especially for large numbers of workers with modest skills. Brun believes China's leaders did not want to risk the consequences of widespread unemployment by scaling back production "in a political and economic system where the perceived legitimacy to rule ... is based on economic development, GDP and full employment."

"They still see it as an employment program," Brun said of the Chinese steel industry.

Leveling the field

As Brun noted, Chinese officials are aware of the issue and have made pledges to scale back capacity.

It's just not going to happen overnight.

Over the past two or three years, he said, China has not been adding capacity as quickly as it was in the boom years. Brun expects that additional statistics, expected out later this month, will show Chinese capacity remained essentially steady over the past year. And he said the country has made commitments to remove 100 million to 150 million tons from the market over the coming years.

"I think the next two years will be very important," he said.

Still, he acknowledges that the international community has to keep the pressure up, though Brun also cautions against knee-jerk reactions.

Brun's report looks to explore solutions without "appeals to protectionism and xenophobia," a theme he echoed in our conversation.

Aside from such a potentially damaging escalation, Brun cautioned that direct tariffs may result in indirect skirting of the law by China — "Whack-a-Mole," he dubbed it, referencing the old arcade game — through a process called transshipment. In that way, Chinese steel might be sold to Singapore or Malaysia or Vietnam to be processed and sold on to other countries, including ours, as value-added products while making the point of origin difficult to identify.

His report concludes that the U.S. and others should continue to pursue traditional trade remedies when specific instances of harm can be substantiated, fully pursue the rights of domestic producers, and postpone the decision to grant market economy status for purposes of the World Trade Organization.

Or as he said several times, keep it on the international agenda.

"The World Trade Organization, bilateral and multinational agreements, G7, G20 talks, all of them are forums where the issue of market economies and nonmarket economics competing on a fair playing field can be addressed," Brun said.

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Roger DuPuis

Roger DuPuis covers Cumberland County, health care, transportation, distribution, energy and environment. Have a tip or question for him? Email him at rdupuis@cpbj.com. Follow him on Twitter, @rogerdupuis2.

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